If an esp only contains records that alter what is in the Oblivion.esm, or another previously loading esm or esp then bash can import the entirety of this esp into itself.
It still exists - but inside the bashed patch. Wrye Bash lets you know this was successful by placing a green cross in the checkox and prompts you to deactivate them (safe to do in 99% of the cases).
If this esp contains any new records (not in the Oblivion.esm, or another previously loading esm or esp) then it must be active.
When Wrye Bash merges esp into them and it is possible that two esp alter the same pre-existing record - it will intelligently sort out which record should win in this (based on load order) and merge accordingly.
Yes deactivate the plugins - although there is a limit of 254 plugins you can have - the more there is active the more unstable your game. Also use ghosting after the merging so as to fool the game engine into thinking the merged plugins are not even there.